The Determinants of Currency Risk Management in Latin American Nonfinancial Firms

This paper investigates the determinants of currency risk management in nonfinancial firms in Argentina, Brazil, Chile, and Mexico, based on a panel data sample of firms that list as American depositary receipts from 2001 to 2004. Our evidence indicates that derivatives held for hedging purposes can yield cash flows of the same order of magnitude of capital expenditures, operational earnings, and financial expense, unlike what was previously found by Guay and Kothari (2003) for U.S. firms. We study not only the decision to use derivatives, but also the magnitude of derivatives holdings and the importance of operational hedging in firms' risk management strategies. We find that economies of scale, financial distress costs, informational asymmetry, and growth opportunities are important for risk management decisions, and that firms do not hedge because of potential tax benefits.